To Pay Cash of Not to Pay Cash: That is the Question

Is it better to pay cash than use credit cards? It depends.

To pay cash or not to pay cash: that is the question.
Whether ‘tis nobler to charge everything, to gain rebates and frequent flyer points, but to suffer:
The demand of paying balances in full: each and every Month.

Or to take up Arms against a Sea of debts
And by opposing, end them: to pay them in full, to sleep soundly and worry-free
No more shall we carry balances on our credit cards
We shall end the heart-ache of indebtedness.
‘Tis our consumption that must decline
For who should bear the Whips and Scorns of outrageous Interest?

(with my apologies to the Bard)

If Hamlet were amoungst us today, would he contemplate out loud whether to use credit cards or cash? He probably had bigger worries. But the best choice for you, dear readers, depends upon a number of factors.

Personally, I despise cash and use it only when I absolutely have to. For me, paying with cash means forgoing – at a minimum – a 1 ½% rebate, or as much as a 6% rebate on purchases. It’s the hassle factor finding a (fee-free) ATM and dealing with handfuls of left-over pennies, nickels and dimes. But most of all, cash expenditures are difficult and tedious to track. I try to keep meticulous records of our spending. Yet, at year-end, there is usually around $100 cash that I cannot account for!

However, if you carry a month-to-month balances on your credit cards and/or make impulse purchases, cash may be the way to go. Here are pros and cons of each:

Cash Pros:

Paying cash is a great method to limit spending – studies prove that paying cash reduces impulse purchases and spending overall
Unlike credit cards, if your cash gets lost or stolen, there’s no risk of identity theft (assuming your driver’s license or other documents did not disappear with the cash)
Some restaurants and retailers only accept cash
Some gas stations offer a cash discount
Cash is the ‘universal gift card’ – for tips and presents

Cash Cons:

If you lose cash, it’s …. gone.
Carrying around lots of cash could make you a target
The time and effort required to physically withdraw cash from an ATM or bank. Possible ATM fees
If you have lots of cash in your pocket, you may be inclined to spend it all (‘burning a hole in your pocket’)
Travel can be much more challenging to arrange: from booking hotel rooms and flights, renting cars, to getting cash in a local currency
Cash expenditures are difficult to track. An essential element of being Frugal and Wise is knowing where your money goes

Credit Card Pros:

Convenience – a credit card is always in your wallet. It can be used for faster transactions at gas pumps, kiosks and the like
Security –a lost or stolen credit card can easily be deactivated and replaced, with no financial loss
Rewards, whether cash back rebates (generally a statement credit) or travel points
Protection and the ability to dispute charges when in disagreement with a merchant
Perks such as extended warranties and rental car insurance
Ease of use when traveling abroad (just be sure your card that does not assess foreign transaction fees)
Statements that are a record of your expenditures

Credit Card Cons:

Very easy to spend too much or buy impulsively. Using credit cards requires considerable self-control
If you don’t pay the full monthly balance, you will be subject to interest charges that could really sap your finances
‘Convenience fees’ are sometimes accessed for using a credit card. Example: property taxes, income taxes, vending machines. Be vigilant. A credit card is probably not worth using in these situations
The possibility of identity theft or unauthorized use. Regularly checking credit card activity and credit reports is a must do

Recommendations and Takeaways:

Although the role of cash is diminishing, it’s virtually impossible to use cash exclusively or credit cards exclusively. We all exist somewhere on a continuum (or blend) between the two
If you are faithful paying your credit card balances in full every month, go ahead and use credit cards for the advantages mentioned above. But be sure that you have credit cards that work hard for you. See recommendations in earlier FW&W postings: 31 Essential, Frugal and Wise Actions – 6, My Favorite Things Part I

If you currently carry credit card balances, cease using your credit cards until the debts are paid off. That should be one of your highest priorities.
Ditto if you are unhappy with your high spending levels and low saving rates.
If you do go with cash, utilize the ‘envelope’ method: split it your cash for the month into spending categories, both discretionary and necessary. Once all the cash in a given category – particularly a discretionary category — is spent, similar expenditures will just have to wait until next month

What are your experiences with cash or credit cards? Please let me know.

Cheers, Paul

A Tale of Two Jackets

The Brooks Brothers sport coat was fabulous but, I ended up with a splendid jacket from Macy’s, at a tenth the cost.

I left Brooks Brothers empty handed but scored this jacket for $120.

It was the best of bargains. Or it was paying full price. It was a wonderful article of clothing. Or one that’s more than ‘nice enough’. It was a wise purchase. Or one made foolishly and impulsively. It was the hope of replenishing my wardrobe for a modest sum. Or sinking into despair when the credit card comes due. In either case, it was for the season of winter rather than the season of spring. (Apologies to Charles Dickens)

I was in need of a replacement navy sport coat (an essential component of any man’s wardrobe.) On a recent Saturday evening, my wife and I journeyed to the King of Prussia Mall. First stop was Brooks Brothers. Having never shopped at Brooks Brothers, I’ve always been curious whether the quality of their offerings justified the prices.

Well, one of the navy jackets I tried on was 100% cashmere. It fit me well. It looked great! It felt great! For a few moments, I seriously considered purchasing it. It was not on sale but I could get a %15 discount if I just opened a Brooks Brothers charge account…

Then a thought popped into my head: a thought that jarred me back to my proper senses. At $1198, this jacket, a mere article of clothing, cost more than a stainless steel deluxe Weber grill with a built-in searing station! Wow, that just really brought everything back into perspective!

(Full disclosure, I do own a Brooks Brothers jacket, a tweed. My wife bought it for me years ago, at a thrift store for $15. It’s getting a bit ratty now but I still like to wear it for the comfort. And bragging rights.)

Next stop: Macy’s and the men’s winter clearance rack. My wife zeroed in on a Ralph Lauren jacket that’s 75% wool, 20% silk and 5% cashmere. ‘List price’ was $450 before a %60 markdown and an additional 25% off Macy’s purchases that weekend. Final price: $135. But wait, it gets even better. The store did not have the navy color in my size, so we ordered the jacket online. The price online after discounts: $118.49!!! It’s quite nice, but certainly not as spectacular as the Brooks Brothers cashmere. But is the Brooks Brothers jacket ten times better? Probably not, at least for me. Granted the Brooks Brothers jacket does contain 20 times more cashmere.

It can be said: A Tale of Two Jackets concluded with a happy ending.

Takeaways and Lessons Learned:

For many items – clothing, audio gear, bicycles, autos – there is a ‘sweet spot’ of quality and price. Spend less and you give up more quality or features than you save in the lower price. Spend more and there is a rapidly diminishing return on money spent vs. incremental quality and features.
Avoid impulse purchases. For major purchases, sleep on it overnight. What’s a major purchase? That all depends on your current financial circumstances: $20, $50, $100, $250…
To put things into perspective, it’s often helpful to compare the cost of one item to another totally unrelated. Example: the cashmere jacket and a Weber Grill.
The Frugal and Wise are not enamored by status of the retailer or the brand. OK I did end up with a Ralph Lauren jacket. But the brand in no way influenced my purchase (if anything a designer brand is a negative factor, IMO.) Besides, you can buy Ralph Lauren stuff at Kohl’s. (Note there’s nothing wrong with buying certain clothing items at Kohl’s.)

Do you have a tale to tell about fantastic bargains? Please share with other readers.

Cheers, Paul

P.S. Not to worry. I will not be acquiring a stainless-steel Weber Grill anytime soon. The one I trash picked is working just fine.

P.P.S. If you are curious about the $1200 Brooks Brother jacket, here’s the link.

P.P.P.S To refresh your memory, here’s the opening to A Tale of Two Cities:

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…

31 Essential, Frugal and Wise Actions – 6

Installment 6 of 6

Photo credit: kirstyhall via Foter.com / CC BY-NC

This is the very last installment of 31 Essential Frugal and Wise Actions (sorry that it did not get posted during the Longest Month of the Year.) I hope these 31 suggestions help you get 2017 underway with a terrific start!

Sell unused items on eBay or Craigslist – liquidate your unused, unwanted possessions for cash! Two such avenues are eBay and Craigslist. Note that selling items on either venue takes time and effort – be sure the potential proceeds are worth your time and effort.

Be aware that both eBay and Craigslist have their downsides. Your eBay sales proceeds are greatly eroded by eBay and PayPal fees. Shipping costs may also be a factor. It also takes time to pack and ship your merchandise. With Craigslist, be very careful about whom you deal with. If possible, meet at a public place to complete the transaction. Craigslist is a good alternative way for large items too expensive or bulky for shipping. For either sale venue, you will need to take photos and create your listing. Before listing, check out the competition – listings for similar items as well as sales history. This will give you some idea of how to price and describe your offering..

I recently had a good experience selling printer ink cartridges on eBay – both unopened and used. My home office printer died and of, course, the new printer uses a different type of cartridge. However, the ink cartridge proceeds covered half the cost of the new printer!

Declutter, Donate and Ditch – take arms against your sea of stuff! Go room by room and assess the situation. What items do you use regularly or really want to hang on to? For everything else, separate it into 4 categories (1) things valuable enough they are worth selling on eBay or Craigslist (2) things worth donating or giving away – be sure to get a donation receipt for tax records (3) things not good enough to donate but may have some value, such as building materials or scrap metal – put them out at the curb and wait for someone to pick them up (4) things that simply need to go into the trash or recycling. Decluttering has an intangible benefit as well; you’ll feel much better about your surroundings.

Make sure your credit cards are working hard for you – this recommendation applies only to those who pay credit card balances in full each and every month. Otherwise, paying off credit card debt should be among your highest priorities this year. That being said, you should be able to get, at minimum:

3% rebates on groceries
2% rebates for gas
2% rebates on department stores
1 ½% rebates on everything else
No annual fees, or an annual fee that more than pays for itself with increased rewards
No foreign transaction fees

OK, it takes more than one card to get all these features. But the combination of just 2 cards: the American Express Blue Cash card and either the Capital One Quicksilver Visa or the Chase Freedom Unlimited Visa will get you there. For more information on credit card deals, check out the FW&W posting My Favorite Things Part I or visit the NerdWallet credit card site. P.S. don’t forget about bonus sign-up offers!

Spend less by shopping less – limiting time spent shopping can reduce spending and maximize your savings. This holds true whether visiting brick and mortar stores or shopping online. If shopping is a recreational activity, perhaps it’s time to find other diversions. When you do shop, have a list and a plan. Resist ‘off-the-list’ impulse purchases. Some people go as far as declaring a spend-free day. Or weekend. Or week. Or even a month! Give it a try.

Find fun things to do on the cheap – you don’t have to spend a lot of money to have a lot of fun. Pack a picnic rather than eating out. Hold a game night with friends. Go walking or hiking. Watch a classic movie on a DVD borrowed from the library. Look for free and discounted cultural events in your community. (for the Philadelphia area, check out phillyfun guide funsavers) You get the picture. Create your own list of fun activities to do this year, on the cheap.

Cheers, Paul

Photo credit: kdee64 via Foter.com / CC BY-NC-ND

31 Essential, Frugal and Wise Actions – 5

Installment 5 of 6

Next to last installment. Actions 23 -26 deal with cutting utility costs.

Shop for the Best Deal on Utilities – did you know that 28 states allow you to select an electric and/or natural gas provider? (Click here to check whether your state offers such a program.) If so, spending a few minutes several times a year could cut your utility bill by hundreds of dollars. There are two components to a utility bill: the supplier portion – the actual gas or electrical power consumed – and the transmission or distribution charge. The distribution portion is billed by your local utility and the price set by state regulators. However, you may be able to select a supplier with lower prices. Generally, each provider offers a guaranteed rate for a given term: 3 months, 6 months, a year, or more. The shorter the term, the better the price, but that means shopping for rates – probably switching suppliers – several times a year.

To give you an idea about how it works, here’s an example from our PECO electric bill (Philadelphia area – kWh = kilowatt hour):

Annual Electricity Consumption:	12,000 kWh
‘Default’ Rate from PECO if no supplier chosen:	7.467 cents per kWh
Our supplier’s rate for a 3 month contract:	4.150 cents per kWh
Estimated annual savings:	$398.04 !!!

Note this is just the ‘commodity’ portion of the bill. PECO charges an additional $8.43 per month plus 6.795 cents per kWh for distribution charges. Ouch.

One caveat: The 3 month terms are something of a ‘teaser’ rate. Once the term ends, the rates could really shoot up, probably even higher than the utility’s default rate. Be vigilant about renewing with another supplier when your contract ends. You could choose a 6 or 12 month contract but at a higher cost. On the other hand, even a penny saving per kWh would result in a $120 annual savings for 12,000 kWh consumed.

Check with your local utility about energy-saving incentive programs — These could include:

A home energy audit free or at a reduced cost
Rebates for purchasing energy-efficient appliances, furnaces and air conditioners
Discounts or rebates for programmable and smart thermostats (see #25 below) Here’s an example of ConEd’s (New York metro) program.
Recycling of older appliances – PECO, in fact, will haul away your old refrigerator for free and pay you $40!

Install a programmable or smart thermostat – depending upon which study, programmable and smart thermostats can reduce heating/cooling costs by 10 – 20%. Note: while smart thermostats cost up to ten times what conventional, programmable thermostats cost, they do not necessarily provide any greater energy savings. Furthermore, there are some security concerns about Internet of Things (IoT), of which, smart thermostats play a part.

Swap out heavily-used incandescent light bulbs for LED bulbs – the cost of LED light bulbs have dropped so far and the energy savings is so great, you should be replacing all the frequently-used incandescent bulbs in your home. NOW! Don’t even wait for the existing bulbs to burn out before replacing. Do you need more facts to convince you? Review FW&W posts Dawning New Light – LED Light Bulbs Can Brighten Your Finance Part 1 and Part2 as well as the LED Bulb Calculator.

Photo credit: elviskennedy via Foter.com / CC BY-NC-ND

Congratulations, dear readers. You have just about made it through longest month of the year! But I still owe you five more Essential, Frugal and Wise actions. Sorry about that. The last installment will be posted in a day or two.

Cheers, Paul

31 Essential, Frugal and Wise Actions – 4

Installment 4 of 6

Actions 17-22 …

Open a Flexible Spending Account (FSA) – wouldn’t you like to save thousands of dollars annually by paying for everyday expenses pretax rather than post-tax? (For a review of the value of money pretax vs. post-tax, re-read A Penny Saved is NOT a Penny Earned.) To refresh your memory: a dollar post-tax (the net proceeds of your paycheck) could be worth a $1.50 or more pretax (depending upon your tax bracket, state and local taxes). Here’s the skinny on FSAs:
- FSAs are only offered through employers. If your employer doesn’t have an FSA program, lobby the HR department to set one up. Signing up for an FSA may only be allowed during the benefits open enrollment period. Ask. If you missed getting in on an FSA for 2017, make sure you get signed up in time for 2018!
- Your FSA is funded through payroll deductions. This lowers your income used to calculate Federal, Social Security, Medicare, and (in some cases) state/local taxes. It’s a wonderful thing!
- There are actually 3 separate FSA programs: (1) Out-of-pocket healthcare expenses – for 2017, up to $2600 annually per household (2) Dependent Care/Child Care – $5000 annually per household (3) Parking and public transportation commuting costs – ($255/month) Note: not all employers offer all three.
- As you incur healthcare, dependent care or commuting expenses, submit documentation to be reimbursed from your FSA. Some programs even provide a debit card for convenience.
- What if you took advantage of all 3 programs to the max? That would be a total of $10,600 paid pretax. Let’s say that your take-home pay after taxes is only 70 cents on a dollar pretax (pretty common). You would have saved approximately $3200 in taxes!
- Use it or lose it! The one downside to FSAs. If you don’t spend all the money in your FSA by year end, you lose it! But even if you have to walk away with some money remaining in the FSA, you may still come out ahead on tax savings. In recent years, the Use It or Lose It rules have been relaxed somewhat. Some plans allow you to claim expenses into the first few months of the following year. Others plans allow carrying up to $500 over to the next year.

Open a Health Savings Account (HSA) – FSAs and HSAs easily confused but are actually two completely different programs. But in some respects, an HSA is an FSA on steroids. Here’s the scoop on the differences and HSA advantages:
- A Health Saving Account can only be used in conjunction with a “high-deductible” health insurance plan. For 2017, a high-deductible policy means a minimum deductible (that you pay) of $1300 per person or $2,600 per family.
- It’s an either/or choice for an FSA or HSA. They are mutually exclusive. However, you could have an HAS for healthcare and FSAs for dependent care and commuting costs.
- HSAs do not have a Use It or Lose It provision. You can accumulate funds in an HAS and use them years or even decades later in retirement.
- HSA contributions may be invested or kept in an interest-bearing account, so the balance grows over time.
- HSAs can be offered by employers or opened by individuals (provided the high-deductible policy requirement is met).
- HSAs offer these tax advantages: (1) contributions up to the annual limits are tax deductible (2) earning and appreciation are tax free. (3) withdrawals for medical expenses are tax-free.
- HSAs have much higher annual contribution limits compared to FSAs. As of 2017: $3,400 per person or $6,750 per family. If you are over 55, add in an additional $1,000 as a ‘catch-up’ contribution. For couples with no dependents on their health coverage, I recommend maximizing contributions by setting up two individual accounts rather than a single, family account.
- Contributions can only be made until age 65 (when you become eligible for Medicare.)

Increase 401K/403B contributions – at a minimum, you should be contributing enough to your 401K or 403B to get the full employer match (typically 6% of your salary for a 3% employer match) failure to do so means losing out on a huge sum of money over a lifetime. This year, try to ratchet up your contribution another 1 or 2 percent. Such a small reduction in take-home pay likely will not be missed but could significantly accelerate your retirement savings. (go back and read You can’t spend what you ain’t got: Why You Need to Automate Your Savings.)

Open a Roth IRA – a Roth IRA is beautiful thing indeed! While contributions are made with after-tax dollars, Roth IRA appreciation and retirement withdrawals are tax-free. There is also some flexibility for withdrawing contributions penalty-free prior to retirement (although I wouldn’t recommend it.) Unlike conventional IRAs, there are no minimum withdrawal requirements in retirement. Contribution limits are $5,500 or $6,500 if you are over 50. Be aware: eligibility to contribute to a Roth is phased out or eliminated at higher income levels ($117,000 for singles or $184,000 for couples as of 2017). And how would you contribute to your Roth? With an automatic deduction, of course! (Note, some employer 401K and 403B plans also offer a Roth option.)

Start saving for the children’s college education; open a 529 Plan(s) – money contributed to a 529 grows tax-free. Many states also permit 529 contribution to be deducted from state income tax (but no such luck on federal tax). Generally, as much as $14,000 per child can be contributed each year (limited by federal gift tax exemptions). 529 Plans are administered on a state-by-state basis. However, you are not confined to your state’s plan; you can chose to go ‘out-of-state’ Here’s one article about the Best 529 Plans (Forbes, March 2016)

Set up automatic transfers to a savings account – there are many reasons for bulking up your savings: establishing an emergency fund in case of layoffs or unexpected expenses, saving for a house down payment, saving for a replacement auto or a major appliance, even a vacation. The list goes on. Set up an automatic transfer to the savings account. Better yet, divert part of your paycheck directly to a saving account. A great place to keep said savings account: the Capital One 360 Money Market account. It’s pays 0.60% interest for balances under $10,000 and 1% for balances over $10,000. And it’s FDIC insured.

Hang in there! Just 6 days to go in January!

31 Essential, Frugal and Wise Actions – 3

Part 3 of 6

Here are Actions 12-16

Review last year’s expenditures – when it comes to managing your finances, it’s difficult to know where you’re going, when you don’t know where you’ve been. Tally up your spending activities from last year using records and statements. Which categories of spending ‘jump out’ at you? Where are opportunities to cut back? How much were you able to save? Don’t have any idea where your money went last year? Skip Immediately to #13 and get this year off to a good start!

Track expenses – tracking expenses is essential for taking control of your finances and planning for future. Do you need to keep such meticulous records that you know where every penny went? Well, no. But the more accuracy, the better. Recording expenses can take many forms: a notepad or journal, a spreadsheet, online (mint.com, budgetpulse.com), a PC program (Quicken, Microsoft Money) or any number of smartphone apps (Mint, GoodBudget, Mvelopes). Personally, I’m old school and use Microsoft Money. It was discontinued years ago but copies are still available on ebay and, it works fine installed on modern PCs. It fits my needs. I am also a little bit leery about keeping financial records in the cloud, or apps such as Mint that directly access accounts,. However, Mint is well regarded.

Set a budget – not to worry. Establishing a budget does not have to be as tedious and painful as you fear. Step one: begin by recording on-going, necessary monthly expenses: mortgages, loans, tuition, phone and internet. Step two: estimate variable expenses based on last year: auto repairs, gas, utilities, house maintenance. Step three: estimate necessities where there is leeway for spending, such as clothing and food – these are areas where spending can range from basic to lavish, from Mac’n’cheese to Porterhouse steaks. Step four: estimate spending for purely discretionary items: vacations, dining out, entertainment, hobbies. Add it all up and adjust the items in steps 3 and 4 to fit your income. Allow (plenty of) room for saving and giving.

Set goals for big-ticket items – some goals may have a timeline of decades (saving for retirement, attaining financial independence). Some last a decade or so (kids’ college education). Others are a few years or even months (replacing a car or appliance, home renovation, down payment on a house, a vacation.) Dream a little, but then prioritize. Evaluate the viability of your goals and what it takes to achieve them.

Set up automatic bill payment to save time and postage, avoid late fees – this action is as much about quality of life as it is about saving money. Life is simply too short to spend it writing checks and stuffing envelopes. Moreover, the cost of postage and stamps can really add up. Say you write 10 – 15 checks a month for recurring bills and donations. A first-class stamp is currently 47 cents. An individual check may cost 10 cents, or more. Altogether, you could needlessly be spending $60 – $100 on stamps and checks every year! Worse yet, what if you overlook or forget a payment and get socked with a late fee? Late payments can also adversely impact your credit score. Set up as many automatic payments as you can for (1) charitable donations, (2) utilities (3) internet and phone (4) credit cards (5) mortgages and loans (6) insurance (7) rent, (8) IRA and HSA contributions, and more.

All for now. Look for Actions 17 – 21 early next week. Cheers, Paul